Up Against the Wall Street Journal

On March 11, 1993, the Wall Street Journal published a long editorial-page article called "The Industrial Policy Hoax." It was by Karl Zinsmeister, a scholar associated with the American Enterprise Institute who in the past had written mainly about U.S. social policy. The article, which was a summary version of a much longer essay published in the Heritage Foundation's Policy Review, argued that Japanese industrial policy had utterly failed. Americans constantly fretted about Japan's industrial success and thought it could be traced to business-government interactions, Zinsmeister said. But a closer look at Japan's record would, in his view, tell quite a different story. Where the Japanese government had tried hardest to "guide" business, its guidance had mainly backfired and produced a series of costly failures. Where Japanese business had most spectacularly succeeded--with cars, electronic products, various high-tech goods--it had done so in spite of government interference, not because of it. With its plunging stock market and depressed corporate profits, the Japanese system was now paying the price for its reliance on regulation and protectionism, Zinsmeister concluded. The most important lesson America could learn from Japan was not to meddle in the same way.

Zinsmeister's argument would seem perfectly familiar to anyone who has read the Journal's editorial page over the last decade or so. In unsigned editorials and in signed opinion columns the Journal had promoted a remarkably seamless and consistent view of Japan. Journal editorials worked from the premise that government intervention must, always and everywhere, depress economic performance. Therefore, if the Japanese government was tinkering with the Japanese economy--through "industrial policies," "informal guidance," and the many other tools frequently described in the Journal's news reports from Tokyo--then either its economy must be doing worse than most people thought, or the gov-ernment must not be interfering as much as it seemed. The Policy Review version of Zinsmeister's article ended with this one-sentence summary of the Journal's credo: "The great global economic lesson of the last generation is that earnest centralized management--even in as mild a form [sic] as existed in post-war Japan--always will bring less prosperity than open market competition."

Anyone who has studied economics in the United States or England knows that this sentence should be true. Anyone who has worked in Japan suspects that it is not a full or satisfying explanation of how national economies have really developed, especially in East Asia during the last half-century. (Does Japan now have "less prosperity" because of the government's efforts after the war to promote savings, acquire foreign technology, and develop high-value production? Zinsmeister may think so, but very few people in Japan believe that so many industries would have grown so fast without such "earnest centralized" coordination and guidance.) But the great value of Zinsmeister's article is that it summed up the Journal's editorial-page line in an unusually stark form. Because Zinsmeister had apparently done little or no first-hand reporting in Japan, he was at the mercy of secondary sources that themselves came from the Journal's "it-can't-be-what-it-seems" school of Japan studies.

When the article appeared, Eamonn Fingleton, an Irish journalist, recognized its value as a specimen of the Journal's mis-statements about Japan. Fingleton, who has reported from Tokyo since the mid-1980s, drafted a long letter to the editor challenging Zinsmeister's assertions one by one. He showed it to several friends in Tokyo who said they'd like to add their names. He sent it to me, and I began circulating a revised version among Japan-hands in the U.S.

For me, two things about this process were extremely interesting. The first was how easy my selling job was. When I mentioned, first to journalists then increasingly to academics, the existence of a mass letter of protest about the Journal's editorial coverage, the typical reaction was, "Can you get it to me right away?" Let me underscore the circumstances: the letter's tone was very tough, and its first signers were mainly journalists. Nonetheless, scholars who had devoted all their professional lives to studying the Japanese economy needed very little persuasion to lend their names. Of the two dozen scholars I contacted, exactly two people declined to sign the letter. I am sure that many who did sign might have written the letter differently if they were drafting it from the start. But the accumulated resentment at the Journal's distortions convinced many scholars to lodge an atypically public complaint. In the end, scholars who had disagreed with one another about many, many things agreed that the Journal's editorial coverage was retarding public understanding about Japan. Those who have followed Japan studies will, I think, be surprised at how many well-known scholars signed on.

The second intriguing element was the Journal's reaction. Its editorial pages daily reinforce the importance of free minds, free markets, and free debate.I now know what I have long suspected: that the commitment to free debate actually means, "as long as you agree with us." I sent the original letter to Robert Bartley, editorial-page editor. For several weeks I could get no response at all from his office. Eventually I located the letters editor, a Mr. Ned Crabbe, who had apparently also mislaid the letter.

After another few weeks of negotiation, Crabbe offered a compromise: Eamonn Fingleton and I could write a column for the Journal's "counter-point" section, pointing out errors in its editorial coverage of Japan. The advantage of this approach is that something signed only by two journalists could have a more free-swinging tone than a committee-approved letter. The disadvantage is that each of us had criticized the Journal's coverage before in print (Eamonn Fingleton in an Atlantic Monthly article that was then on the newsstands), so there was no surprise value in our saying so again.

When I relayed this news to Crabbe, he steeled himself to do the honorable thing. He agreed to run a version of the letter, with all the signatures, that was about half as long as what we had originally submitted. Two days later, he called me with different news. He had, he said, "been directed by my superiors on the editorial page" to offer a different "compromise." The Journal would print all the signatures, but would print virtually none of the letter itself. Bartley (as I came to understand, but not through Crabbe) dictated that every discussion of specific error in the Zinsmeister piece be cut from the letter. He agreed to run the first and last paragraphs, and nothing else. This the Journal did, on May 20.

A few weeks before the Zinsmeister piece appeared, I had sat in the same room with Bartley, at a conference in Singapore sponsored by the Asia Society. For years the Journal and Dow Jones had fought the good fight against the Singapore government on issues of free expression. The censors who dominate Singapore's leadership have repeatedly cracked down on the Journal (and its sister Far Eastern Economic Review) for "meddling" in Singapore's internal affairs by publishing critical reports. The Dow Jones leadership in general, and Bartley in particular at this meeting, have replied again and again about the need for open criticism and free debate. Just not in our own pages, please.

Herewith, the letter:

To the Editors of The Wall Street Journal:

As observers who have studied Japan, the international economy, and industrial policies for a number of years, we wish to point out to your readers how persistently slanted and misinformed has been coverage of the Japanese economy on your editorial pages. It has never been more important for business executives and policymakers to understand the relative strengths and weaknesses of different economic systems. Your paper should be leading in this effort. Instead it has repeatedly misinterpreted and ignored evidence so as to sustain its pre-existing worldview. The result has been to make it much harder to debate the proper role of the government in their economy.

The immediate occasion for our comments is the editorial page article "The Great Industrial Policy Hoax" (March 10, 1993) in which Karl Zinsmeister of the American Enterprise Institute has characterized Japanese industrial policy as an unrelieved failure. The significance of this article is twofold. First, its misinformation content is unusually high: virtually every sentence is a misconception or an outright misstatement of facts. Second, the article's misinformation and bogus claims have been drawn largely from previous Wall Street Journal editorials or op-ed features. It therefore provides a convenient representative sample of all that it is wrong with the Journal's coverage. Our complaint is not with Mr. Zinsmeister: as he has apparently never worked in Japan, he can hardly be held accountable for errors which he has absorbed in good faith from reading the Journal. The fault lies with those who have published misguided articles of this sort almost daily for years.

Our purpose for the moment is not to argue all the underlying assumptions in the Journal's view of Japan, or the consequences of those assumptions for U.S. economic policy. Those of us who have signed this letter represent a broad spectrum of views about Japan's policies--and about appropriate responses for the United States and Japan's other international trading partners. But we share a concern that many of the items you have repeatedly presented as "facts" about Japan are nothing of the sort.

1) Mr. Zinsmeister paints a picture of uniformly incompetent Japanese bureaucrats who have held back every industry under their supervision. He recounts, for instance, an anecdote about how the Ministry of International Trade and Industry in the early 1950s at first turned down Sony's application to buy the rights to the transistor from Western Electric. The dim-witted bureaucrats, he implies, did not recognize the potential of the technology. How could bumblers like these have guided or coordinated the Japanese "miracle?"

Had Mr. Zinsmeister known more about MITI's history and its policies, he would have realized that there were other and more probable explanations for its attitude toward Sony. In those days MITI routinely vetoed applications for imports of technology on the grounds that the price was "too high." Thus MITI's role, among others, was to provide the Japanese buyer with a no-lose pretext to negotiate further concessions from foreign technology suppliers, who then were principally Americans.

In any case, MITI had a policy of making sure that important new technologies with global export potential were assigned as far as possible to the most competent and sophisticated Japanese companies. Sony at that time was a tiny company, untested in global operations. Precisely because officials recognized the transistor's tremendous global potential, they undoubtedly needed some persuading that Sony was the right company to exploit such an important industrial opportunity.

Few who have studied Japan's technology import policies doubt that the state's role was pivotal not only in ensuring that Japanese industry tapped in quickly to the most advanced American and European breakthroughs but did so at stunningly low cost. The Japanese government's principal concern at the time was to make sure that Japanese companies did not bid up technology costs against each other, and at the same time to conserve Japan's supplies of foreign exchange. As a result, MITI often required joint applications, from several companies, for the same import licenses. This strategy reduced costs and diffused technology far more effectively than could have happened without government intervention.

2) According to Mr. Zinsmeister, the Japanese computer industry has been a "disappointment." In the view of some experts, Japan's output of computers and computer-related products will pass that of the United States later this decade--not bad given that in 1971 Japan's world market share was a mere 3.4 percent versus 92.5 percent for the United States. Bolstered by MITI's negotiating muscle, various fledgling Japanese computer companies formed alliances with American computer giants in the 1960s. Toshiba teamed up with General Electric, Mitsubishi Electric with TRW, NEC with Honeywell, and Hitachi with RCA. In each case the erstwhile Japanese pupil is now a leading player. By contrast the American teachers long ago disappeared as independent entities or have left the industry altogether. Perhaps the most interesting "disappointment" is Fujitsu. Two decades ago, it was one-fiftieth IBM's size. Last year, its sales reached $31 billion, half the level of IBM's.

America's current computer success stories, from Apple to Compaq to Sun, rely heavily on Japanese components. Articles like Mr. Zinsmeister's tend to dismiss these Japanese ingredients, from RAM chips to display screens, as mere commodities, but increasingly they are commodities that no American firms can make. Perhaps the Japanese strategy of concentrating on manufacturing, rather than on design and software as many American firms are doing, will prove to be mistaken. But perhaps not. In the view of many Japanese industrialists, high-tech manufacturing will be harder for newcomers to enter, and offer better prospects for long-term economic rents, than software or design.

3) Mr. Zinsmeister cites MITI's attempt in the 1960s to foster mergers in the auto industry; this was a failure, he maintains, because the Japanese industry today boasts nine auto companies in "fierce competition" with each other. In fact Mr. Zinsmeister has set up a straw man by implying that Japanese corporations are expected blindly to follow MITI diktats. Industrial policy has always been a matter of negotiation in Japan and corporations have always been free to offer counter proposals if they felt that the government's ideas were misconceived. Indeed, one reason industrial policy so often succeeds in Japan is precisely that firms help shape the choices available to the government. In any case, the view that Japan's nine auto companies compete atomistically with each other is an illusion. The Japanese industry has seen significant concentration since the 1960s and is today dominated by just three companies, Toyota, Nissan, and Honda. Most of the other companies have significant business or financial links with at least one of these three. Competition among the large industrial groups can of course be fierce, but the competitive forces are often stimulated and harnessed by MITI rather than left simply to play themselves out.

4) Mr. Zinsmeister contends that "American companies . . . have used superior technology and manufacturing to take back submarkets--like printers, hard drives, and palmtop computers--that were once believed to be slated for Japanese dominance." Great credit is due the American companies that have made a come-back in those sub-markets. But it would have been difficult for them to prosper without a decade of U.S. government pressure on Japan to eliminate, or at least moderate, some of the most onerous effects of Japan's industrial policy, including the closed domestic market, dumping of the very products Mr. Zinsmeister mentions, and cartelization of component markets.

More important, Mr. Zinsmeister's statement exemplifies a basic blind-spot in The Wall Street Journal's worldview. The Journal and its contributors routinely count as "American" any product sold under an American label such as Apple or Hewlett-Packard. Behind this habit of mind lies one of two assumptions: either that products with American brand names are usually made in America, or that no matter where they are made the brand name is what matters for American economic strength.

The first assumption is wrong. Take laser printers, the area of Hewlett-Packard's great success. The core technologies in laser printers are the laser engines and the driver (that is, the operating system software). Only the latter is made in America. According to U.S. government sources, Japan's Canon company enjoys an 80 percent market share in the engine. While American companies still dominate the software for the printers, to the extent that they do any manufacturing, it is mainly confined to assembly and customization of Japanese-made printers for the American market. The situation is similar with hard-disk drives and with palmtops. According to U.S. government sources only a negligible proportion of palmtops and hard drives for personal computers are made in the United States.

The other possible assumption--that sales of Apple palmtops and Seagate hard drives are just as valuable for the American economy, whether they are made in Japan, Singapore, or the United States--is at least debatable. Corporations can argue that they are moving toward higher value design and engineering niches. But Journal articles and editorials routinely assert this view without any argument, or without considering the powerful evidence on the other side--including the insistence of governments in Japan, South Korea, and most other industrialized countries on encouraging manufacturing within their country's borders. The great exceptions to this approach have been the United States, Canada, and, to a smaller degree, Britain. It cannot just be a coincidence that the American "success" stories the Journal so often recounts have so little impact on the U.S. employment base.

5) Mr. Zinsmeister maintains the Japanese steel industry has been a "net drag" on Japan's national income. With 54,000 workers, Nippon Steel last year generated sales of $24 billion. By comparison USX-U.S. Steel's 22,000 workers produced sales of $5 billion. The Japanese company therefore achieved sales per head roughly double that of the American company. Of course many adjustments are needed to make a fully accurate assessment of relative productivity but few who have studied the figures doubt that Japan is way ahead in steel -- or that Japan's industrial policy was a crucial element in the post-war development of its steel industry. Superior productivity is a major reason why Japan's iron and steel industry is the country's second biggest exporter, exceeded only by the automobile industry (whose success in turn has been built in part on the quality of Japanese steel). The biggest importer of Japanese steel is the United States, and American steel mills are now heavily reliant on Japanese finance and technology. Mr. Zinsmeister says that "tens of thousands of steelworkers have been laid off." In fact MITI has devoted tremendous effort to seeing that workers whom steel factories shed are not simply "laid off" but accommodated in other industries.

6) Mr. Zinsmeister says that "efforts to build up Japan's aircraft and aerospace industries have produced only inferior products at absurd prices." This would be a telling criticism if Japan were entering these fields for strictly economic reasons. If Japan's goal had simply been to get the most airplane for the least money, its military would buy off-the-shelf models from the U.S. arsenal (rather than insisting on building U.S.-designed planes, under license, in Japanese factories) and its aerospace program would rely on low-cost rockets from Europe, the former Soviet Union, or the United States.

Why has Japan not done these things? Because its decisions about the aerospace industry involve factors such as the desire to acquire technology and concerns about national security, rather than the simple cost-per-unit of an aircraft. Airplanes are the only high-tech manufactured item in which Japan is a large net importer--but an increasing share of what Japan imports consists of components Japanese firms sold to Boeing in the first place. There is no secret whatsoever about the Japanese government's desire to build a "purely Japanese" space-launch system, so as to avoid dependence on American rockets and satellites, or its goal of building an internationally competitive domestic aerospace industry. The result is a 'failure' in Mr. Zinsmeister's one-dimensional terms but is manifestly sensible from the Japanese perspective."

7) "Government coddling has made Japanese airlines extremely inefficient." Japan Air Lines boasts annual revenues per employee of $359,600--versus just $138,300 at American Airlines and $143,500 at United. The Japanese industry's cost per seat-mile is high compared to the American industry's. But far from stemming from wasteful deployment of people or planes, this difference is mainly a function of Japan's much higher wage rates (and also the higher cost of imported items such as aircraft fuel). The Japanese airlines' administrative efficiency is evident in low ground staff numbers and extremely high revenues per employee. JAL's load factor--the ratio of paying passengers to seats available--is one of the world's highest. In the second half of the 1980s, for instance, JAL's load-factor exceeded United's by eight percentage points--a stunning edge in an industry where a percentage point makes the difference between large profits and large losses.

8) "Nippon Telegraph and Telephone. . . is not very efficient." NTT may still be less "efficient" in certain respects than some of its foreign counterparts, and Japanese phone rates are generally higher than in the United States. But this is merely another example of the interest of Japanese consumers being subordinated to those of Japanese producers. The Japanese government two decades ago targeted the "knowledge-intensive" and "information" industries for protection and promotion. Both in hardware and in services, the Japanese telecommunications industry is gaining in world competitiveness. It will become a more formidable competitor in its own right, and it will strengthen the other Japanese industries that rely on it to collect, store, move, and manage information.

9) "Nine percent of the work force is tied up in farming." Official figures show that the statistical category of "agriculture, forestry, and fishing" accounts for just 6.7 percent of the Japanese work force. The figure for farming alone is at most two-thirds of Mr. Zinsmeister's assertion, and it has been steadily going down. It will decline more rapidly through the rest of this decade, as the average age of Japan's farmers is just under 60 years.

Does Japanese industrial policy work? When Western economists ask this question, they usually mean whether Japan has met ideal standards of allocative efficiency, as prescribed by neoclassical economic theory. That is the wrong question. The more significant questions are: first, whether the Japanese approach has succeeded on Japan's own terms, which place great emphasis on developing high-value industries inside Japan; and, second, how this policy has affected industries in other countries. Given Japan's history of national growth, which has been consistently twice the American rate through the tweintieth century, and given the ubiquity of industrial-guidance laws, state-sanctioned cartels, and other symptoms of industrial policy, the burden of proof would seem to lie with those who say that industrial policy has not worked. From steel to autos to semiconductors and super-computers, the areas of greatest trade friction between the United States and Japan in the past 20 years have been precisely the areas which the Japanese government has targeted with its industrial policies. The evidence is overwhelming that none of them could have become so competitive so fast if the Japanese state had played no role.

Some of those who have signed this letter disagree with others about the exact power and prescience of MITI and other Japanese state institutions. None of us believes that the Japanese government in general or MITI in particular always succeeds. But we all agree that it is impossible to understand the Japanese economy without recognizing and understanding the way the state interacts with industries in Japan. This does not mean that Japanese techniques can be transplanted blindly to very different kinds of societies in North America or Europe. Everyone who understands the differences between Japanese and American societies sees that any attempt to impose a detailed industrial policy on the United States would require major, perhaps unacceptable, changes in America's basic economic, social, and political institutions. But this is no reason why Japan's success should be swept under the carpet, let alone characterized as failure. To do so promotes self-delusion about America's competitive position and postpones the moment of serious discussion about economic revival.